NZ regulatory regime well adapted to financial landscape

Release date

19 June 2013

Effective prudential regulation is a crucial component
of a sound and efficient financial system, the Reserve Bank's Head of
Prudential Supervision Toby Fiennes said.

In a speech to the
Law and Economics Association of New Zealand, Mr Fiennes said the international
regulatory framework has developed rapidly over recent years and New Zealand has
responded accordingly.

"The global financial crisis has led banking
regulators around the world to revisit their whole approach. Here in New
Zealand, the finance company failures and the repercussions from the Canterbury
earthquakes have underlined the importance of sound regulation that can help
prevent failures.

"We have strengthened and built on the key features of our regime,
including an early tightening of liquidity standards, reflecting the adverse
liquidity shock experienced during the global financial crisis. We have been
fast adopters of the tougher Basel III capital standards, with some tailoring to
New Zealand conditions. We have also extended our prudential oversight regime to
cover insurers and non-bank deposit takers (NBDTs)."

"The New Zealand approach places significant emphasis on
self-discipline and with regulatory requirements we have tried to minimise
complexity while ensuring strong capital and liquidity buffers," Mr
Fiennes said.

"This approach works well for us in New Zealand. We have a relatively
simple financial system, for which a straightforward, conservative approach is
well-suited."

Mr Fiennes said New Zealand's financial system remains in fundamentally
good shape, with the banking sector maintaining high levels of capital and
adequate liquidity buffers, the core payments systems generally operating
smoothly and the insurance sector positioning itself well for future shocks.

"But New Zealand can't afford to be complacent. We will continue
to be vigilant and forward-looking in our supervision with a focus on key risks,
key business drivers and board accountability," Mr Fiennes said.

"As well as strengthening the oversight of systemically important
payment and settlement systems, the Reserve Bank will also look for
opportunities to simplify regulatory regimes and harmonise them across
sectors."

Mr Fiennes said legislation does not require the Reserve Bank to protect
against every failure – no regulatory regime could realistically achieve
this - nor to protect consumers from the direct effects of failure. However, the
regulation and supervisory regime does provide significant safeguards to reduce
the likelihood and impact of failures.

"Although failures are unlikely, we will remain prepared and will
continue to develop our response toolkit, drawing on insights from international
experience."

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